Do you struggle to look for an effective costing method to improve your business in the next term? And you are being stuck in untangling the hard topic of “What are the main costs and limitations of implementing abc systems?” on the economic forums you are in recently? If so, dropping by our blog is a good decision to have a better orientation for your work in the future.
Let’s dig in with us to find out the answer you need.
What Are The Main Costs And Limitations Of Implementing Abc Systems?
In this first section of this post on “What are the main costs and limitations of implementing ABC systems?,” we will identify the main cost.
The Main Costs of implementing ABC systems
There are two main costs to implement this costing method- ABC system, called activity cost pool and cost driver.
Activity cost pool (or called activity cost center)
An activity cost center is a set of single costs related to an activity in the system. For example, the cost center of a customer’s order might be allocated the total costs of resources expended by accepting and processing the order, containing costs of paperwork procedure and any costs related to installing machines for customers.
When you classify all of your costs into a group (pool), to expose the overhead expenses, you need to bear in mind that there is no amount of fixed groups you require to have.
Cost drivers
The cost driver is a term in relation to controlling changes associated with the cost of a single activity. Instances of the cost drivers contain machine parts, machine hours, or labor. Besides, you can assign this kind of cost to each activity cost pool. When you separate the general overhead into a cost center by your cost drivers, you will get the cost driver rate.
Also, there are two phases of the sort of cost that are perceptible and particularly at the first-phase named resource cost drivers and the other named activity cost drivers.
Until this line, we have already handled half of the issue “what are the main costs and limitations of implementing abc systems?”, now we are going to unleash the next part with the restriction of the ABC systems.
The Limitations of implementing ABC systems
There are six key limitations of carrying out the ABC systems. They are:
- The ABC system is quite complicated to explain to related parties of the costing method. Specifically, the ABC requires the leadership to evaluate the consumption of activity cost centers and estimate or identify cost drivers to properly allocate cost. Some cost allocating groundworks might be asked at the activity cost pool phase in some categories like rates, building depreciation, rent, to name a few.
- Implementing this costing system may consume a lot of your time because many steps and meticulous groundwork are needed to have an accurate cost.
- Not match with small production interests. In detail, the level of manufacturing and technology environment is common in different manufacturers and impacts the ABC system’s implementation. If leadership isn’t considering using ABC information, another option might be an absorption costing system which can be more suitable to apply.
- Tough to determine the inclusive activities that impact costs. Allocating specific activities to accurately identify which costs to come out of the overhead costs is quite hard. Unless activity costs arose from some real-time operation which is ascertainable in qualitative aspect and that might be associated with production output, the cost drivers would also not be activating.
- Not simple to pick the most appropriate cost drive. The assistance received from the ABC system may not match the costs. Hence, leaders have to determine which activity costs are truly pertinent to the current decisions before considering ABC data as a key costing method for an organization.
- Hard to measure cost on the theory base of activities. Some ABC data might be misinterpreted with ease, so it should be checked practical information thoughtfully when utilized to make strategic decisions.
Well, once you have reached this sentence, we know that your curiosity about “what are the main costs and limitations of implementing abc systems” is no longer anymore.
Conclusion
As a summary of the main ideas for today’s topic, these are two main costs and six restrictions of applying ABC systems.
Until these final thoughts, we bet that you have already answered the question we mentioned earlier, “What are the main costs and limitations of implementing abc systems?”
Not only that, but you also have a view more clearly about ABC systems.
Thank you for reading. And don’t forget to share this content with others who have the same interest as you.
